Classifying a neighborhood by “type”, or what many investors refer to as a “grade”, is typically nothing more than a subjective description. Although most people will have a general idea of what is being referred to, in my experience it is usually nothing more than a qualitative rather than quantitative description.
The simple fact is that the best real estate opportunities are not always found in your neighborhood or local market. You may have heard the saying, “all real state is local”. Well, with over 400 markets around the United States, some markets become more favorable than others as they transition through their individual market cycles. That means that at any given time there will be markets that offer you better opportunity in terms of cash-flow and/or appreciation potential.
There are many advantages to investing in markets that make the most sense:
Over the past decade, almost all of the growth in America’s households has been driven by renters, especially renters of single-family residences (SFRs).
Owning the stereotypical modest home with a white picket fence was long a hallmark of the suburban society that characterized the second half of the twentieth century (at least in the popular imagination). But the foreclosure crisis triggered by the Great Recession made renters out of millions of former homeowners.
If you’re looking for a reason to reject a potential tenant because of a gut feeling, here are 99 reasons to do so. If something seems “off” and you don’t know why, trust your instincts. Your neighbors and other tenants will thank you.
This is a sure sign that this tenant can’t really afford the property. Asking before the showing means that the value of the property means little to them, they only care about the cost.
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Three powerhouse metropolitan areas — New York, Los Angeles, and Houston — together accounted for one of every seven new jobs created in the country over the last three years. These top three markets added 300,000+ new jobs from 2012 through 2014.
A total of 17 metro areas added at least 100,000 new jobs during that three-year period.
The percentage of U.S. households that own a home has dropped significantly since 2008, and experts say this downward trend may well continue for at least several more years.
Over the last ten years the nation has lost 1 million net homeowner households and has gained a whopping 10 million rental households.
There are two basic types of real estate markets: Linear and Cyclical.
Cyclical Markets
Cyclical markets are real estate markets that tend to have larger price moves up and down over the years. Property values move up and down like a roller coaster ride with noticeable peaks and troughs. They are the shooting stars of housing booms (and busts). Cycle lengths vary between markets but often last between 7 to 10 years from end to end.
The transformation of the American Dream, most broadly manifested in popular folklore as the aspiration of the US middle-class to own a home (even if it means agreeing to a 30-year loan with one's friendly neighborhood too-big-to-fail bank), into the American Nightmare, in which an entire generation (the Millennials) is locked out of purchasing a home due to over $1 trillion in student loans hanging over every financial decision, an abysmal jobs market (for everyone but college educated “waiters and bartenders” whose hiring is on a tear), and banks' unwillingness to lend money to anyone that can fog a mirror, and forcing millions of Americans to rent instead of buy, has been duly documented here before.
An unexpected side effect of the mortgage crisis has been the replacement in many neighborhoods of single-family homeowners with renters. An article from the Urban Institute, took a closer look at the 14.2 million single-family rental units in the US and found that renters are living in smaller, older and slightly less suburban homes than homeowners, and are poorer, more racially and ethnically diverse and younger than homeowners.
The feedback I get from investors across the country is that we are in a seller’s market. Prices are up. Inventory is low. Properties in the hottest markets are selling over asking price with multiple offers. Investors are paying “more than they want to” just to get a deal done. The ratio between rents and purchase price is favoring sellers and squeezing investor buyers out of the market. Another way to describe this trend is that CAP rates are decreasing, or “compressing”.
We are approaching a delicate part of the market cycle where the flood of inexperienced investors is driving prices up to places where experienced investors shake their head and wonder, “How is the winning bidder ever going to make a profit?”
